Economic fallout from decoupling from China 'vast and volatile'

30 November 2022

Reshoring, friend-shoring and other potentially restrictive trade policies are likely to end up being self-defeating if the sole aim is to isolate countries like Russia and China, experts have warned.

Research scholar Samuel Hardwick and Adam Triggs, a visiting fellow at the Crawford School of Public Policy, wrote for the East Asia Forum that “the notion that onshoring, or producing domestically, makes supply chains robust is a fallacy”.

While onshoring or friend-shoring policies have become an established feature of US trade policy, such policies are unlikely to help achieve economic or security objectives, they said.

“Products that are made domestically usually have inputs from overseas,” they pointed out, which means “onshore” supply chain are rarely as “onshore” as they seem.

Referring to moves such as the US decision to restrict exports of semiconductors and semiconductor technology to China, they wrote that other strategies were more likely to achieve security objectives, and at a lower cost.

These included safeguarding sensitive research, as well as investing in monitoring and enforcing contracts.

“Unilateral restrictions like export controls will be self-defeating if the target can find substitutable products or information elsewhere. It’s not worth spending billions upgrading the gate if there is a huge gap in the fence,” said the authors.

And they recommended that policymakers considered other tools rather than trade policies to achieve supply chain resilience.

This could include real-time monitoring of supply networks, combining private and public datasets, and regular stress testing for supply chains of critical goods or services.

Other recommendations made by the authors included implementing automatic stabilisers in tax and transfer systems and lowering trade costs through agreements, customs reform or infrastructure investment.

“If friend-shoring is just decoupling from China by another name, rather than smarter international cooperation, the economic fallout is likely to be vast and volatile,” the authors added.

“China’s global value chain-related output – the value of a country’s production that crosses at least two borders – is the highest in the world. China is also the world’s top exporter of intermediate inputs, particularly in the electronics sector.”

This could lead to shocks upstream and downstream in supply chains in companies that had reshored or friend-shored production.

In terms of trade, openness offered benefits including securing export revenue for R&D, inflows of talent as well as lower prices.

Analysts are warning that Washington’s “Chip 4” initiative to starve China of chip-making technology and high-end chips through export controls risks alienating allies such as South Korea which stand to lose substantial trade with China.

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